WA Premier Barnett sees China making less steel

West Australian Premier
Colin Barnett
has weighed into the contentious debate around China’s peak steel ­production, siding with a more conservative forecast favoured by many analysts.

Mr Barnett said he believed Chinese steel production would peak at between 800 million and 900 million tonnes annually.

That is well shy of the 1 billion tonne figure used by the world’s biggest iron ore miner,
Rio Tinto
, in its forecasts.

“I’m not planning on that [1 billion tonnes annually]," he told AFR Weekend during a visit to Shanghai.

“I suspect Chinese steel production will start to taper off towards the end of this decade."

Iron ore is the single largest export earner for WA and contributes around 20 per cent of revenue to the state budget.

It is forecast to deliver $6.1 billion into the WA Treasury, via royalties, in the 2015-16 financial year. The premier’s forecasts come as Rio’s board assess how and when to ramp up its WA-based iron ore operations in the Pilbara from 290 million tonnes a year to 360 million tonnes.
BHP Billiton
is increasing production of the steel-making commodity and fellow Pilbara-based producer,
Fortescue Metals Group
, is in the process of increasing its yearly output to 155 million tonnes. The extra tonnes are expected to tip the market into surplus by approximately 2016.

Mr Barnett’s more conservative outlook is in line with many analysts who believe China’s demand for iron ore will slow, as its economy moves away from infrastructure and property as the main drivers of growth.

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However, the WA premier believes a surge in demand for natural gas, as China looks to clean up its power sector, will offset the impact of a maturing iron ore market.

The debate over China’s peak steel production has been raging for the last two years, as growth in the world’s second-biggest economy slowed from 10.4 per cent in 2010 to a forecast 7.5 per cent this year.

The slowdown has fuelled debate over China’s continuing demand for iron ore. In a presentation to analysts in September, Rio put up a slide headed “Chinese steel growth still has a long way to run."

It also forecast that Chinese steel production would peak at more than 1 billion tonnes annually around 2030, before falling slightly.

China’s steel production is forecast to reach 780 million tonnes this year, according to Graeme Train, an analyst at Macquarie Capital Securities in Shanghai.

Mr Train believes Chinese steel production will peak at 925 million tonnes annually, by mid-2020.

But despite the lower peak Macquarie has upgraded its long-term price expectations for iron ore.

“We conclude iron ore prices will remain above $US115 a tonne over the next two years and remain above $US100 a tonne out to 2020," said Mr Train in a report released on September 26. He had previously forecast a long-term price of $US80 a tonne.

Mr Train believes Chinese steel production will grow at an annual rate of 1.8 per cent over the next decade.

CLSA analyst David Radclyffe estimates China’s steel production will peak at 900 million tonnes a year by 2019.

“Everyone assumes China’s steel production will peak out at some point and plateau. That’s not the argument any more, it is just when it happens and everyone is predicting that at around the end of the decade," he said.

The spot iron ore price was trading at an unseasonally high level of $US133 a tonne on Friday, just 16 per cent lower than its 12-month high of $US158.9 a tonne in February this year.

The price is far higher than the same time last year where the spot price was approximately $US115 a tonne after briefly falling to $US86 a tonne in ­September 2012, forcing higher-cost producers to shelve expansion plans and lay off staff.

Additional supply from Australian and international iron ore miners, together with the eventual peak in demand from China, is expected to weigh down prices in the long term.

“We have iron ore going back to $US70 a tonne on that forecast which is one of the more conservative estimates out there. The world will be well supplied with iron ore by the time that occurs," said Mr Radclyffe.